Shale Oil – Crash Course Chapter 21

34 Comments on "Shale Oil – Crash Course Chapter 21"

shallowsand on Sat, 15th Nov 2014 7:18 am 



I do not know about points 3 and 4, although I suspect 4 may be true. My opinion is 1, 2 and 5 are on the money.
The only thing that will bail many of these wells out over the long term is:

1. Much higher oil prices than present, $100-125+ per bbl WTI and/or

2. A thick tail, I.e. 20-50 bopd in years 6-30.

Boat on Sat, 15th Nov 2014 8:07 am 



Fracking is still happening at $80 oil so how much money was made at $100? Think of the jobs and less money paid for oil to other countries. Transportation will follow the money in a capital driven economy.

wildbourgman on Sat, 15th Nov 2014 8:39 am 



“Fracking is still happening at $80 oil so how much money was made at $100”

Boat, even if the rig count in shale plays were to shut down fracking could go on for months due to a high back log of wells that still need to be fracked.

Kenz300 on Sat, 15th Nov 2014 8:47 am 



New risky projects will all be reevaluated with oil at $80 and dropping…………..

KSA wants to slow its competition and hurt Iran and Russia……….. It is already hurting them…..

A few bankruptcies will dampen the enthusiasm for risky plays……..

ghung on Sat, 15th Nov 2014 8:53 am 



Boat: “Fracking is still happening at $80 oil so how much money was made at $100?”

My former boss, back in 2008, was still building spec homes even though sales were well below his break-even point. A year later he defaulted on >$30 million in loans leaving numerous unfinished houses, many unsold properties, lower property values in the area, and several developments in foreclosure.

His next stop was the Bakken, where he’s still building spec homes…….

He says he has no choice except to keep “moving forward” (until he can’t).

kenberthiaume on Sat, 15th Nov 2014 8:54 am 



It doesn’t matter how fast they deplete. That just means they’ll drill more intensively. What matters is their all in costs per barrel.

They also say they’re getting more barrels per drilling dollar as they learn geology of the plays better.

shallowsand on Sat, 15th Nov 2014 9:00 am 



Boat. Try doing the math with actual oil and gas recovery rates, actual well head prices and actual expenses. Some wells are good at $20-30 oil. EOG has the best locations overall IMO.

Wildbourgman is correct. And many will keep on drilling hoping for higher oil prices and will only stop when they run out of cash.

Many shale drillers have low cash balances and high debt loads, after a period in the past two years of WTI over 90+. Hopefully for them oil will head back up to that level shortly so they can continue the cycle. If they stop drilling and just produce what they have got and the oil price stays at or below current levels for a couple of years, I am afraid very few could pay back what they have borrowed.

I may be wrong and I’m looking for someone to refute my thesis with numbers.

rockman on Sat, 15th Nov 2014 9:06 am 



A very mixed bag of points thrown out. Tainted a bit by: “3.They are environmentally damaging because the fracking fluid is highly toxic and much of it escapes during the blowback process and sometimes water wells are contaminated.” Very, very rarely has there been any evidence of the frac fluids “escaping” during its injection or recovery. Essentially all the contamination has resulted from improper/illegal disposal of the nasties. IOW a problem that can be addressed with proper regulations AND ENFORCEMENT.

“4.Because each well has low flow and depletes quickly”. Just the opposite: Even with $120/bbl oil the shales would have never taken off if they came on with “low flow rates”. Yes… rapid depletion but from initial starts of hundreds of bopd.

“…a very expensive set of plays that will only last for a very short while.” Well, da! Yes…true of the shales. Just as it’s true of every play ever developed. The big oil plays developed in Texas during the late 40’s/early 50’s was relatively expensive to develop during that time. And that play quickly declined. Same for the Austin Chalk horizontal oil play during the 90’s.

Not to get to preachy but most folks don’t appreciate that oil has never been cheap or easy to explore for relative to the time period. Those old onshore US legacy fields are much bigger then ones being discovered today. But that doesn’t mean they were easy to find given the technology/data base at the time. And the economics of those efforts were no less dependent upon the price of oil as it is currently.

oilystuff on Sat, 15th Nov 2014 9:30 am 



I concur with point 4, for sure. There is a highway in S. Texas, a major route to Mexico, that is completely destroyed by oilfield traffic. Driving down that highway is like boating on the open sea, down in the tough you cannot see the trucks you are on a collision course with until you get back up to the crest. At lease one oilfield hand is killed on this highway a week. S. Texas will never be the same.

There are over 11,000 wells in the Bakken and the loss of productive farm land, or grazing is unbelievable. Cows cannot eat limestone. All 11,000 plus of those wells will have to be plugged one day, all those tanks and separators destroyed because of NORM concerns, all those pads picked up and moved (where?) and that land restored. My estimate per well for plugging and decommissioning: 150-200,000 dollars each.

eugene on Sat, 15th Nov 2014 9:31 am 



I’m no oilman but it’s obvious to me that when it comes to energy there’s a whole lot of bullshit flowing. Endless rattling on about energy independence, how much money can be made at this or that price, costs, etc, etc.

One thing is very obvious to me. We are going back and picking up the crap we bypassed decades ago which means higher cost, less return, time consuming, etc. And knowing human nature, it will be more environmentally damaging. And yes, I know if it’s done right, all will be well. But that’s not how it works in the real world. Booms don’t attract the finest, most ethical workers in the world. It’s scramble, cut corners, job not done quite right, things done in a hurry and a good bit of “to hell with it, get it done”. A whole lot of it will be done just fine but some won’t. Just the way it is.

shallowsand on Sat, 15th Nov 2014 9:32 am 



I agree ROCKMAN. I am trying to emphasize my view that these wells are only good at much higher oil prices than at present, on the whole.

A way to emphasize this would be Continental. The market cap is right at 20 billion. Total liabilities are at 10 billion. Most recent boepd is 182,000. That means market valuing their production at $165,000 per boepd. There is a lot of gas in that boepd figure. They only had 152 million of cash at end of q3, and for them that is high. Has been running under 30 million. They really burn through it.

I think 165,000 is very high for high decline production, 3/4 of which sells for around $60 at the wellhead. The market must be pricing in much higher oil price in future, hope market is right.

Noteworthy total liabilities for CLR have went from 1.3 billion at end of 2009 to 10 billion at end of q3 2014. Not good unless oil prices rebound significantly. Mr. Hamm is betting on that as he liquidated all of CLR oil hedges. Hope he is correct.

Again, tell me what I am missing.

shallowsand on Sat, 15th Nov 2014 9:35 am 



Oily, trying to get my son interested in plugging and cleanup business. He is in high school and loves working outdoors. I think timing would be right on about 15 years. Would have to live in S Texas or ND.

oilystuff on Sat, 15th Nov 2014 9:57 am 



Shallow, its a thought, for sure. I would assume all those coiled tbng. units used to wash frac sand and drill out plugs, etc. will then be used to set plugs, but just scrapping up all the pads and trucking all that rock somewhere boggles my mind.

Eugene, I think there has always indeed been some level of bullshit about oil and gas exploration, yes, sir; its pretty good bullshit too because often we believe it ourselves. But that term took on a whole new meaning when the shale oil business came along.

shallowsand on Sat, 15th Nov 2014 10:07 am 



Another back envelope calc I have made about CLR. If they drill nothing in 15 and 16 and applied all net income to debt, assuming price stays here in 15 and 16, they could get total liabilities down to about 5.5 million and would exit 16 with about 60,000 boepd. What would market cap be then??

rockman on Sat, 15th Nov 2014 10:09 am 



Eugene – “. And knowing human nature, it will be more negative environmentally damaging.” It might be difficult to believe but the negative environmental impact of oil field activities in Texas today (despite the emphasis on frac’ng) is much less than it was during the boom times decades ago. Not only were the regs less protective back then the enforcement by the state was minimal. It wasn’t the “good ole days” for the environment.

There will always be oil field accidents that do environmental damage. Wells blow out and kids are killed in school bus accidents. But with good regs and enforcement it can be an overall positive effort.

shortonoil on Sat, 15th Nov 2014 10:39 am 



Oily, trying to get my son interested in plugging and cleanup business. He is in high school and loves working outdoors.

He will certainly have job security. The acids in the ground water break down the concrete in the plug. A plugged well only stays plugged for about 20 years. Reports I have seen indicate that almost every plugged well in Pennsylvania over 20 years old is leaking some methane. There is almost a million of them. At $200,000 to $750,000 per plug he should be rolling in it in no time. That is, if the state doesn’t go bankrupt first.

Northwest Resident on Sat, 15th Nov 2014 10:53 am 



eugene — “We are going back and picking up the crap we bypassed decades ago…”

Here we are crawling through the end of the age of oil like a man lost in the desert dying of thirst and searching for water. Nothing but scraps and crumbs left. And we’re still trying to pretend that everything is going JUST FINE. When the world finally wakes up to the predicament we’re in, there is going to be hell to pay.

kenberthiaume on Sat, 15th Nov 2014 10:53 am 



It isn’t just net income that is applied to debt. Drilling costs are capitalized and expensed against production, theyre not expensed up front. So cash flow from oil production is much higher than stated profits.

If they they stop drilling their cash flow is the net earnings plus amortization of $40 a barrel or so. Look at their cash flow statement for reference.

The easiest way to pay debt is stop drilling. Drilling uses cash.

Most drillers would rather have a well giving 200k barrels total over two years that one giving 5x as much over 100. Faster recycling of cash equals higher roe. So faster depletion isn’t bad necessarily. Depends on the roe achievable.

kenberthiaume on Sat, 15th Nov 2014 10:54 am 



Endless amounts of oil at 60 to 80 $ per is not scraps and crumbs. It’s a feast.

tahoe1780 on Sat, 15th Nov 2014 12:57 pm 



I understand that profitable shale plays at $80 refers to “Half-Cycle” costs – wells drilled on existing pads with existing roads, pipelines, etc. New projects requiring infrastructure are only profitable in the $100 -$120 range. True?

kenberthiaume on Sat, 15th Nov 2014 1:31 pm 



Probably not true. Shale is more profitable now than initially as they’ve improved drilling techniques. And it never would have taken off if it needed prices like that.

rockman on Sat, 15th Nov 2014 3:36 pm 



Tahoe – It’s difficult to put a one size fits all number to it. Yes: any infrastructure requirement beyond just the actual well cost will require a higher oil price to justify. But there are other factors: some undrilled locations have a higher risk that requires a higher price. OTOH all leases expire if they aren’t drilled during the primary term: don’t drill and you could lose rights you paid hundreds of $thousands for so you might poke a hole that didn’t have the best economic profile.

As I just pointed out elsewhere there were individual wells drilled a year ago that would have been profitable at $20/bbl and wells you would have lost your ass at $150/bbl. A fact easily proven by pulling up just their first 12 months of production.

I appreciate the desire to make general statements such as it takes $X/bbl to drill shale wells. It just doesn’t capture the real dynamics going on out there. It requires a great deal of analysis on a company by company basis.

Nony on Sat, 15th Nov 2014 3:41 pm 



Any way you cut it, the US added a million bpd every year for 3 years straight. A pretty phenominal increase. So much for the people (piccolo, Rune, countless peaker commentators) who said it wouldn’t make a difference.

If it turns off at $80/bbl, so be it. At least, we know DAMNED WELL that it will turn on again at $100/bbl. US LTO has been the key supply source that stopped us from getting to $150/bbl. Even if it can’t get us to $30 (because it turns itself off), it has still be super beneficial to consumers by limiting the increase and finally pushing prices down somewhat.

Oh…and it sure doesn’t fit into a Hubbard model that takes no account of prices sustaining supply (by making new tranches economical) and takes no account of search and production technology evolution.

rockman on Sat, 15th Nov 2014 4:47 pm 



“…it has still be super beneficial to consumers…” Of course it has: what could be more beneficial to the US consumer then the 300% increase in the price of oil that created the shale boom. LOL.

Boat on Sat, 15th Nov 2014 6:26 pm 



The tax base went up. 3 mbpd less imports. Better wages for thousands of workers. Less wasted fuel due to high price. Spurs innovation of alternate transportation and efficiency. Lots of positives.

shallowsand on Sat, 15th Nov 2014 6:57 pm 



Made another error. Re CLR I meant billion not million.

rockman on Sat, 15th Nov 2014 7:36 pm 



“Lots of positives.” Balanced against the increase in the US oil bill from $225 billion/year to over $600 billion/year.

“3 mbpd less imports.” And sending more US $’s overseas today then when we were importing more oil at a lower price.

Nony on Sun, 16th Nov 2014 8:04 am 



SS/Rock:

1. Wells are not perfectly predictable. Even in/out the sweet spots, there is some distribution of results. E.g. in an area where the average IP is 1000 bpd, you might have some wells at 2000 or some at 500. I don’t know the exact distribution function, and I bet it is a lot tighter than conventional drilling. But still, there’s an average around which some are lower, some higher.

This reminds me of the book publisher who asked his editors why they didn’t just select bestsellers. (If they knew that…) 😉 Or look at movies. They’re not quite widgets.

If every single well was earning its return, you’d be leaving money on the table, would be under-drilling. You’re not skiing, if you’re not falling.

And for a company, drilling a lot of wells, what matters is the overall performance. If they can get 50 wells at an average 1000 bpd IP, that’s great. And they will tolerate, the above and below ones. Of course, if they have a field where the average is 2000 (and min is above 1000), great…you drill that first. [Although even here, I bet they downspace to lower it in the end and get more total oil out.] And if there is an area where the average is 200, then you ignore it. Even though a few wells might be economical, the average unknown one won’t.

[I’m assuming high decline, shale type wells. and the comments about IP are illustrative of the concept, not that I’ve calculated what IP is needed.]

Now…when things get tighter price-wise, what happens? Some fields with lower average IPs don’t get drilled. Those with sufficient ones still do. But you’ll ALWAYS have some individual wells that are uneconomical.

Furthermore, some of the costs (e.g. leasing bonus) are sunk. In some cases, they might have got off easy. “We don’t pay retail.” -Hamm. But in other cases, leases/acreage (even infrastructure and development) might have been done at a higher oil price expectation. But if it’s a sunk cost, that just hurts for the people that paid it. The decision to go after oil is not affected by the sunk cost loss.

Davy on Sun, 16th Nov 2014 8:10 am 



NOo, the economy responds to malinvestment sunk cost if widespread enough in an already unhealthy economy. There is no free lunch like we see in Econ 101.

Nony on Sun, 16th Nov 2014 8:11 am 



2. I think a lot of what the market is valuing is the undrilled acreage (what Rock talks about). Their “drilling inventory”. You can do a download of all the wells CLR has. Can compare it to their acreage. Can do your own calculation of how much downspacing is possible. [Or development of lower benches for spots HBPed by MB wells.] You can look in their presentation for their calcs. Can look in the SEC 10K for a lot more detail and external valuation of the reserves. Or really, you can even estimate it yourself. There is a huge amount of detail available with a very minimal payment to state of North Dakota. [I’m not sure about Oklahoma date, though.]

Any way you cut it, just evaluating them by current production (fast declining, agreed) is unfair. Look at how OFF THAT WOULD HAVE BEEN, if you had done it in 2013, 2012, 2011, etc. When their growth was essentially within the Bakken on already leased lands.

Nony on Sun, 16th Nov 2014 8:15 am 



(2 above is in reference to CLR, for SS)

coffeeguyzz on Sun, 16th Nov 2014 12:58 pm 



Brief input, (great to see such high level, if varying viewpoints on this site) … oily stuff, Aug.16 release from North Dakota’s DMR site contains aerial photos spanning multi years in the Bak’s most highly developed areas. The physical impact/footprint may be surprising to some.
Nony/ss, the 114 page 2014 Analysts/Investors report from Continental contains SO much information that it will be used for reference for many years to come. The almost unspoken-about Springer play – just above the Woodford – may be highly instructive as to the ongoing financial/physical evolution in this arena. (With a payzone thickness approaching 1,000 feet and a Total Organic Content (TOC) between 4%-10%, it is remarkable that the Woodford itself is little discussed).
Rockman, if you have yet to see slides #28-#32 from CLR’s presentation, you may find it of interest to see the multi-well fracturing results displayed therein.
There is growing recognition that the vertical connectivity can be/is being seen to extend no more than 100 feet. Various configurations are being developed and employed to have the lateral formation connectivity to be robust and yet not extend farther than 300 feet from the wellbore.
All these components should enable more efficiencies going forward.

marmico on Sun, 16th Nov 2014 2:04 pm 



And sending more US $’s overseas today then when we were importing more oil at a lower price.

The net petroleum import bill for 2014 is ~1% of nominal GDP. It was about the same in 2003 before the rise in price. It has come full circle in the last decade. No big deal.

http://www.census.gov/foreign-trade/Press-Release/current_press_release/exh9.pdf

Northwest Resident on Sun, 16th Nov 2014 6:02 pm 



Marmico — I don’t believe rockman was saying anything about percent of GDP. His comment specifically addressed the amount of dollars being sent overseas for oil imports. I found a source that claims America spent $122 billion in 2003 for oil imports — not a great source, but a source, and I don’t have time to look for a better one. Link below. And so far in 2014 America has spent $260 billion on oil imports (more than double that spent in 2003) with October, November and December not yet accounted for. Wouldn’t that tend to back up exactly what rockman is saying? Now, if rockman had said that America was spending a greater percent of GDP today for oil imports than in 2003, then your comment would be addressing the point rockman made. But that isn’t the point rockman made, and your comment doesn’t address the point rockman made. In fact, America is sending more $$$ overseas today for oil imports than in 2003. Or, being the stat-master that you are, perhaps you have one or more sources that dispute the $122 billion in 2003 imports that I found?

http://books.google.com/books?id=fqnlNP0h29MC&pg=PA41&lpg=PA41&dq=cost+of+net+petroleum+imports+in+2003&source=bl&ots=y6UHlViRs1&sig=nHY8WeL40OD9_0SEYxXjPQAZjcw&hl=en&sa=X&ei=yjdpVOPKOaf1iQLE0YG4Dw&ved=0CDkQ6AEwBQ#v=onepage&q=cost%20of%20net%20petroleum%20imports%20in%202003&f=false